New IRS Rules Place Limits on Tax Refund Direct Deposits

Starting in January 2015, the IRS will limit the number of refunds that are electronically deposited into a single financial account or pre-paid debit card to three, as part of the agency’s effort to crack down on fraud and identity theft.

Under the new rules, if a taxpayer exceeds the direct deposit limit, he or she will receive a notice from the IRS. Any subsequent refund would then be mailed in the form of a paper check. The taxpayer would receive the refund check in approximately four weeks. The status of that refund can still be checked using the IRS’s Where’s My Refund? tool.

The IRS noted that the vast majority of taxpayers will not be affected by the new rules, and encouraged taxpayers and tax preparers to continue using direct deposit.

“It is the fastest, safest way for taxpayers to receive refunds,” the IRS stated.

The direct deposit limit is designed to prevent criminals from easily obtaining multiple refunds. The limit applies to financial accounts, such as bank savings or checking accounts, and to prepaid, reloadable cards or debit cards.

However, the limitation may affect some taxpayers, such as families in which the parents' and children’s refunds are deposited into a family-held bank account. Taxpayers in this situation should make other deposit arrangements or expect to receive paper refund checks.

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According to the IRS, the new rules also will protect taxpayers from unethical tax return preparers who obtain payment for their tax preparation services by depositing part or all of their clients’ refunds into their own bank accounts.

Direct deposit must only be made to accounts bearing the taxpayer’s name. Preparer fees cannot be recovered by using Form 8888, Allocation of Refund (Including Savings Bond Purchases), to split the refund or by preparers opening a joint bank account with taxpayers. These actions by preparers are subject to penalty under the Internal Revenue Code and to discipline under Treasury Circular 230. More information can also be found on the Circular 230 Tax Professionals page.